Get smart with your money
By Liz Weston
In an ideal world, your retirement accounts would be left alone for retirement. You’ve probably noticed that we’re not living in an ideal world.
Early withdrawals can have serious repercussions, including big tax bills today and potential shortfalls in the future. In my latest for the Associated Press, alternatives to consider and what to do if you absolutely must touch your savings.
By Liz Weston
Saving and investing for retirement may actually be easier than deciding how to safely spend what you’ve accumulated.
Withdraw too much and you could run out of money. Withdraw too little and you might stint on some retirement pleasures you could actually afford. Taxes and Medicare premiums should be considered, too, since both could be inflated by the wrong withdrawal strategies.
Financial planners use powerful software to model various ways to tap retirement funds so they can recommend the best options for their clients. Recently, some companies introduced similar software that consumers can use to find the most tax-efficient, sustainable strategies.
In my latest for the Associated Press, a look at the pros and cons of these new programs.
By Liz Weston
Dear Liz: I agree with this concept of delaying Social Security to lessen overall taxes and have a further suggestion. My spouse and I are gradually converting our traditional IRA account funds to Roth IRAs. The converted funds are immediately taxable but could continue to gain in value and future distributions would not be taxable. Also, Roth accounts don’t have required minimum distributions.
Answer: Conversions make the most sense when you expect to be in the same or higher tax bracket in retirement.
That’s not the case for most people because they’re in a lower tax bracket when they stop working. Some older people, however, do face higher tax rates in retirement — typically because they’ve been good savers, and required minimum distributions from their retirement accounts will push their tax rates higher.
When that’s the case, they may be able to take advantage of their current lower tax rate to do a series of Roth conversions.
The math can be tricky, though, so it’s advisable to get help from a tax pro or financial planner. You don’t want to convert too much and push yourself into a higher tax bracket, or trigger higher Medicare premiums.
If your intention is to leave retirement money to your heirs, Roth conversions may also make sense now that Congress has eliminated the stretch IRA.
Stretch IRAs used to allow non-spouse beneficiaries — often children and grandchildren — to take money out of an inherited IRA gradually over their lifetimes. This spread out the tax bill and allowed the funds to continue growing. Now inherited IRAs typically have to be drained within 10 years if the inheritor is not a spouse.
To compensate, some people are converting IRAs to Roths — essentially paying the tax bill now, so their heirs won’t have to do so later. Heirs would still have to withdraw all the money in an inherited Roth IRA within 10 years, but taxes would not be owed.
By Liz Weston
Dear Liz: I am retired. My income is from a small pension, Social Security and dividends and interest from investments. I’ve made some bad investments, but I’m still earning a satisfactory return. Is there some kind of formula that I can use to determine whether I should sell a stock, take the loss and seek another investment or keep the stock, enjoy the dividend and worry the stock might drop further?
Answer: One approach is to ask yourself if you’d buy the same stock today. If not, then it may be time to sell these shares. Be sure to consult with a tax pro first because you may be able to use losses on one investment to offset taxable gains on another.
You also might ask yourself if it’s time to transition away from active investing and individual stocks. Most people aren’t able to buy the stock of enough companies to be truly diversified. Then there’s the daunting task of staying up to date on the fortunes and prospects of each company and industry. That’s way more work than most people can handle. Even if you’re up for the task now, you might not be in the future.
Also, most people don’t do well with active investing. Trying to figure out when to buy and sell for maximum gain usually results in excess trading costs that lower your returns. It’s also too tempting to hang on to a losing stock rather than admit you made a mistake, or to chase “hot” stocks that have already had their biggest gains.
A better approach would be a portfolio of mutual funds or exchange traded funds that’s regularly rebalanced, either by a financial advisor or a computer algorithm. If you opt for funds that mimic a market benchmark, you’ll be assured of matching the market and getting a better return than most active investors can achieve.
By Liz Weston
Dear Liz: My wife and I retired in 2019 and ran into IRMAA — Medicare’s income-related monthly adjustment amount, which increased our monthly premiums. I thought I’d done such a good job budgeting for retirement but missed this. A lot of couples have their best income years at the end of their career and then get blindsided by the cost of Medicare and the adjustment based on their previous income. I will say that the folks at the local Social Security office were very helpful, and they supplied us with forms for an exception based on our new income.
Answer: IRMAA can boost premiums substantially for singles with yearly income above $87,000 and married couples with incomes above $174,000. The increases for Medicare Part B, which covers doctor’s visits, range from $57.80 to $347 a person per month. The surcharges for Part D, which pays for prescription drugs, start at $12.20 and top out at $76.40 a person per month.
The adjustments are based on your income two years prior (so 2018 income determines 2020 premiums). You can appeal the increase if you’ve experienced a life-changing event. Retirement with a subsequent drop in income can be one such event. So can other work stoppages or reductions, marriage or divorce, the death of a spouse, loss of income-producing property or loss of pension income.
Even without IRMAA, healthcare costs can catch many newly retired people by surprise, especially if they previously had generous employer-subsidized coverage. Medicare doesn’t cover everything; it has deductibles and co-pays in addition to premiums, and excludes most vision, hearing and dental expenses.
How much you pay out of pocket depends on your health, where you live and what supplemental coverage you buy. A study by Vanguard and Mercer Health and Benefits estimated that a typical 65-year-old woman in 2018 could expect to pay $5,200, but her costs could range from $3,000 to $26,200. (The researchers say a 65-year-old man’s costs are typically about 3% lower.)
By Liz Weston
Dear Liz: At the moment I contribute to a 403(b) retirement plan at work. I have another 403(b) with a former employer, but haven’t contributed to it since I changed jobs several years ago. Should I contribute to both rather than just one? Also, my current employer offers a deferred compensation plan, but they don’t offer a match. Should I contribute to that or stick to the 403(b)s?
Answer: Once you leave a job, you can’t contribute to its workplace retirement plan. You could leave the money where it is, or perhaps transfer it to your current employer’s plan. Rolling it over to an IRA, though, could give you access to a wider variety of investments at a lower cost. Fees for 403(b) plans tend to be higher than for their workplace cousins, 401(k)s, and the investment options are typically more limited as well.
You also may want to contribute to the deferred compensation plan. These plans allow you to make deductible contributions that can grow tax-deferred, much like a 403(b), 401(k) or other retirement plan. But unlike other retirement plans, there’s typically not a 10% federal penalty for early withdrawals (although the money will still be taxed as income). Having some money in a deferred compensation plan could give you additional flexibility in the future.
Advertisement